Century Lab plans to purchase a new centrifuge machine for its Manitoba fa

cility. The machine costs $137,500 and is expected to have a useful life of eight years, with a terminal disposal value of $37,500. Savings in cash operating costs areexpected to be $31,250 per year. However, additional working capital is needed to keep t

he machine running efficiently.

The working capital must continually be replaced, so an investment of $10,000 needs to be maintained at all times, but

this investment is fully recoverable (will be "cashed in") at the end of the useful life. Century Lab's r

equired rate of return

is 14%. Ignore income taxes in your analysis. Assume all cash flows occur at year

-

end except for initial investment

amounts.

Required

1.Calculate NPV.

2.Calculate IRR.

3.Calculate AARR based on net initial investment. Assume straight-line depreciation.

4.You have the authority to make the purchase decision. Why might you be reluctant to base your decision on

the DCF methods?